-------- Original Message --------
Subject: Re: Texas reporter
Date: Mon, 14 Nov 2011 18:04:59 -0500
From: Pete Sepp
To: Gardner Selby <wgselby@statesman.com>

Hi there:

Happy to help out. First, the letter I mentioned that we wrote to the "Supercommittee" on bad debt-reduction ides, this rebate scheme being one of them:


Also, thought you'd like to see some of our work from the 2003 Part D debate, where we were quite active in getting together a coalition to oppose its enactment. I've included them as attachments to this email.

Now, onto the explanation. The President's proposal, part of his Plan for Economic Growth and Deficit Reduction submitted to the Supercommittee, contains a variant on the rebate scheme I referred to above. It is explained in basic form on page 37 of the actual document (or page 47 of the PDF document, in the section "Align Medicare Drug Payment Policies with Medicaid Policies for Low-Incoem Beneficiaries." You can get a link to the plan here:


Based on our experience, calling this rebate plan anything less than a tax fails to capture all of its effects:

1) With a few exceptions that the Secretary of HHS would be able to approve (an uncertain proposition), drug manufacturers would be required to rebate 23 percent of the average manufacturer price (more if the drug price rose quicker than inflation) for a brand-name pharmaceutical that was distributed to lower-income Part D beneficiaries. Otherwise, the company could not participate in providing drugs to Medicaid, Medicare, or other government beneficiaries. Considering there are already genuine rebates (i.e., negotiated discounts) under several such programs, this latest demand from the government for being able to sell to a huge segment of the entire consumer drug market in the U.S. seems more like a mandatory extraction than a voluntary refund. 

2) The money collected from these "rebates" don't wind up in the actual consumers' pockets or the various Part D plans; instead they go to a fund that will defray certain government Medicare program costs. A "rebate" as is commonly understood is something that the consumer of product receives after purchase. This "rebate" is nothing of the kind, and represents deceptive terminology.

3) The "rebate" is based on a percentage of price per unit, a lot like the way some excise taxes on products such as some tobacco items work. 

4) This "rebate" will in essence squeeze the price bubble somewhere else. Either other Part D beneficiaries get stuck with higher premiums, people in private, non-Medicare plans pay higher prices for their drugs, or drug development and access gets scaled back, or even voluntary discounts start to dry up. For a good summary of how this could happen, as well as some previous CBO work on this topic. I'd suggest the following link at American Action Forum, which former CBO Director Douglas Holtz-Eakin serves at:


In sum, for us, calling this a rebate is a terribly misleading term, while calling it a tax comes closest to describing its effects on seniors, the economy, and in the current fiscal policy debate.  Regarding our policy toward contributors, I'd refer you to the following online:


Pete Sepp
Executive Vice President
National Taxpayers Union

NOV. 15, 2011, 215 PM:

I didn't see a feature yet on your site so I thought I'd send you a couple other good links to commentaries that discuss the rebate scheme:



Yes, there are several groups like ours (AEI, Galen Institute, American Action Forum) who share concern that this proposal amounts to a tax. And yes, those on the other side of the issue will always question the motives of those who don't share their beliefs. As I noted in our conversation, I'm working on this issue because I believe it's the right stance, not out of monetary motivation. That statement of ethics I sent provides more background on how we come to policy decisions and how donations are treated. Let me know what else we can provide.

226 PM, 11/22/11:

1) "There's nothing in the proposal that calls this a tax and experts we visited say rebates like the one in Medicaid never have been called taxes." I don't know who the experts you consulted are or whatever policy agendas they may have, but here are people in the health policy field who agree with the ad's contention that the rebate proposal is best described as a tax. 

Here is Joseph Antos of AEI, who served on the  the Maryland Health Services Cost Review Commission and advised the Congressional Budget Office. who writes: 

"The so-called rebate isn’t a rebate at all. For a large number of Part D patients, it’s going to function as a tax. Forcing lower drug prices for a few will dramatically inflate health care costs for the rest." See:  http://www.nydailynews.com/opinion/obama-plan-force-rebates-medicare-drug-benefit-drive-costs-thousands-seniors-article-1.976435#ixzz1dhbBGZwe.

Here is Antos with Guy King, former CHIEF ACTUARY for Medicare and Medicaid, in an AEI paper, writing:

"One of Washington's great political canards is that a tax on business really does not affect anyone other than the companies on which the tax is levied. Usually such a foolish statement is left implicit, but unfortunately that seems to work for most people. The public often seems to have the visceral belief that the initial incidence of a tax is also its final incidence.

Like a tax, the requirement that pharmaceutical manufacturers pay a minimum rebate has its initial impact on the manufacturers but the final incidence would be borne primarily by patients, who are the end-users of the prescription drugs." See: http://www.aei.org/papers/health/healthcare-reform/tampering-with-part-d-will-not-solve-our-debt-crisis/

Here is Douglas Holtz-Eakin, former CBO Director, who along with Michael Ramlet writes:

"While it is easy to understand the political appeal of the rebate proposal and claims of “windfall” based on a fragmentary view of how Part D works, the policy foundations deserve closer scrutiny. In the end, not only will the cost of a new government rebate, like any tax, be borne somewhere else in the economy, but this analysis shows that seniors will also be forced to pay much higher premiums for their prescription drug plans." See: http://americanactionforum.org/topic/cost-shifting-debt-reduction-american-seniors

Here is Grace-Marie Turner of Galen Institute, who writes:

"Leading congressional Democrats appear ready to impose a new tax on prescription drugs for seniors -- a tax that would increase Medicare drug plan premiums for some seniors by as much as 40 percent. Those lawmakers wouldn't describe their plan that way, of course, but that would be the effect of their proposal to require drug companies to pay Medicaid-style rebates to Medicare." See: http://www.kaiserhealthnews.org/Columns/2011/July/072511turner.aspx.

2) In another email you had asked, "There's nothing in the proposal that calls this a tax." My answer: well, of course not! Supporters call this a rebate so they can raise revenues for the federal government without branding their scheme a tax and having to answer a lot of inconvenient questions about it. Just because they don't want to call it a tax doesn't mean it won't function like one (see above). That's exactly the point of our ad, and our mission for the past 42 years -- exposing attempts by the political class to cover up a proposal that walks, talks, and hurts like a tax by calling it something else. 

As the Professor's answer below notes (even though he has other comments about the ad), "For the pharmaceutical manufacturers, this rebate functions like a tax." I would also refer you to the research I sent earlier about how the LIS rebates will function very much like excise taxes do, on an ad valorem basis on the product sold. The reporting system, the method of valuation, the payment remittances all look like an excise tax.

You had asked: How does Obama's rebate plan translate to a tax of at least 23 percent "on the Medicare prescription drug benefit?" Rebates would be paid by drug makers to government. That's not the same, or even close, to taxing the Part D benefit itself -- right? It's way closer than you think when you take a look at some of the projected impacts in the links and studies I indicate above. As several of the authors indicate, it amounts to squeezing the bubble. In one scenario, R&D costs take a hit, so, possibly, drug development slows and higher hospitalization costs accrue for government programs (see http://www.nber.org/papers/w8996). Or, consumers in private plans bear a bigger cost for their prescriptions (see http://mba.yale.edu/faculty/pdf/scottmortontestimony.pdf). Or, other Medicare Part D beneficiaries (i.e., non-LIS) take a hit (see  http://www.cbo.gov/ftpdocs/105xx/doc10543/08-28-MedicarePartD.pdf and  http://americanactionforum.org/sites/default/files/AAF_Part%20D%20Financial%20Impact%202%20.pdf).  Likely, the impact will be a combination of these factors, plus, perhaps, lower rates of return to shareholders in the companies, and perhaps fewer job-creation opportunities within the companies. These have impacts on government revenues the other way, downward.

3) You asked about the mandatory nature of the proposal: "That's their choice, no?" To me, that's like saying someone who lives 20 miles from their job and can't afford car-registration fee increases can always choose to stop driving and walk to work. That is a choice they can make, but not a practical one, and it is influenced directly by conditions that government creates. One of the reasons we opposed Medicare Part D's creation was precisely because it would give government more control over health care decisions in the economy. As more seniors have opted to participate in Part D (though some portions of the program are under automatic enrollment), federally administered programs have captured a larger share of the overall prescription drug market. Note the following news article: "Those filled under a Medicare Part D plan or through Medicaid represented 30 percent of all prescriptions in 2010 versus 22 percent in 2006 - a clear indication of greater dependence on government programs for medicines." See: http://health.yahoo.net/news/s/nm/us_drug_spending

Add in other programs, such as FEHBP and VA, and you have an increasingly dominant market share by government. For Congress and the White House to legislate more influence over drug-purchasing in the United States, and then say, "well, if you won't pay our latest kickback demands you can't sell in the empire we've created" is coercive. Remember, many previous rebate agreements, especially with government employee insurance, are the product of a negotiated process between drug manufacturers and plan administrators. This latest rebate proposal, as well as equivalents in Congress, would be the product of compulsory legislation.

4)  The only hint at who would pay this tax described in the ad is the end of the statement, "for low-income beneficiaries.” Why is that language in the statement? Is it because you expect the beneficiaries to pay the rebate? The President's rebate proposal applies to benefits for low-income individuals, though of course, it might be expanded if it were to move through Congress. But would these beneficiaries be affected? The answer is, quite possibly, which is why we raise a concern. As the Antos-King study notes:

"Focusing on rebates specific to the LIS population ignores the fact that Part D plans negotiate rebates and price discounts for drugs on behalf of their entire covered populations. Policy choices made in the Medicaid program do not transfer simply to the Part D program, which serves a broader population. Contrary to claims made by proponents, the legislation would not restore a similar requirement that previously existed for dual eligibles, and the wider application could disrupt a program that is working well. Perversely, the minimum rebate proposal could discourage Part D plans from seeking to enroll LIS individuals. In the current Part D market, manufacturers have complete flexibility to negotiate discounts with the plans. Plans with larger enrollments and those that are willing to set formulary and cost-sharing policies to favor a manufacturer's products are rewarded with higher rebates—effectively, lower prices for the pharmaceuticals used by the plan's enrollees." 

There's also the concern that the LIS portion of Part D has had a low pick-up rate anyway, and it's difficult to imagine a rebate scheme like this actually improving the rate. See, for example, the commentary by Kaiser Foundation on pick-up rates here: http://www.kff.org/medicare/upload/8094.pdf.